Employment Report Disappoints but Probably Won’t Delay Federal Reserve’s Tapering Plan

The September employment report disappointed analysts; will it also complicate the Federal Reserve’s plan to begin withdrawing the monetary support that has cushioned the economy throughout the pandemic?

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Continuing what has become a familiar pattern, June’s economic reports generated mixed signals, some hinting at a strengthening recovery and others threatening a prolonged period of economic blahs.

On balance, it appears, the blahs are winning, primarily because employment growth can’t seem to rise much above sluggish.

Private sector employers added only 71,000 workers in July-- fewer than analysts had projected--while initial jobless claims jumped by nearly 20,000 the last week of the month, the largest increase since April. The unemployment rate remained unchanged (and uncomfortable) at 9.5 percent.

“There really is no upside momentum in the labor market, and that’s a critical long-term determinant of where the economy is going to go,” Steven Ricchiuto, chief economist at Mizuho Securities, told Bloomberg News. “People just aren’t getting jobs,” he added.

Adding to an already lengthy list of disappointing results, the pace of economic growth declined to 2.4 percent in the second quarter compared from 3.7 percent in the first quarter, falling short of analysts’ projections and well below the level needed to generate strong and consistent employment gains, most economists agree.

While expressing confidence that rising wages will begin to strengthen consumer spending over the next several quarters, Federal Reserve Chairman Ben Bernanke also acknowledged in a recent speech that the country “has a considerable way to go” to reach a full recovery. “The slow recovery in the labor market and the attendant uncertainty about job prospects are weighing on household confidence and spending,” he noted.

Dialing Back Predictions

The Fed has slashed its growth estimates for the balance of the year, boosted its unemployment projections, and begun discussing the steps policy-makers may be willing to take to stimulate the economy, if necessary. Notably, even the most conservative Fed governors are no longer worrying publicly about a resurgence of inflation, and understandably so:

  • The index of leading economic indicators fell 0.2 percent in June;
  • Manufacturing activity, a source of strength this year, continued to grow, but at a slower pace; and
  • Durable goods orders declined in July for the second consecutive month.

“Overall, we have no doubt this data will play badly in the markets,” Paul Ashworth, a senior U.S. economist with Capital Economics, said of the durable goods figure. But despite the month-over-month decline, he told USA Today, “business investment had a very strong second quarter. And although the recovery in manufacturing may be losing a little momentum,” he added, “it is hardly collapsing.”

Nonetheless, analysts at Moody’s.com have increased the odds that the economy will be in a recession six months from now, the first time since February their assessment has turned more pessimistic.

For the Moody’s analysts, as for many economists, consumer spending, or the lack of it, remains a major concern. Recent data indicate that spending declined even more than anticipated last year and increased less than expected in the second quarter, as cautious consumers once again shifted their emphasis to saving, socking away 6.4 percent of personal income, which remained essentially flat.

“The optimistic view is that consumers have built up a bit more of a cushion than we thought,” Nigel Gault, chief United States economist at HIS Global Insight, told the New York Times. And if consumers have made more progress in repairing their tattered finances, Gault said, “then maybe they could spend a little bit more freely going forward.” But he doesn’t expect to see a strong spending rebound any time soon. “It’s difficult to see consumer spending doing a lot better until we see more job growth,” he told the Times.

Still Struggling

The increased saving rate and declines in delinquencies on credit cards and other consumer loans suggest that many households are regaining their financial balance. But many others are still struggling. Consumer bankruptcy filings in July increased by nearly 10 percent over the June level, a pace that would produce more than 1.6 million bankruptcy filings this year compared with 1.4 million in 2009.

Consumer confidence levels, which have been bouncing from positive to negative in recent months, sank to their lowest point since November, with both the Conference Board and Thomson/Reuters/University of Michigan indexes turning sharply negative.

“Consumers have a lot to be concerned about,” Eric Green, chief market economist at TD Securities, Inc. noted in a research report. Lyn Franco, director of the Conference Board’s Consumer Research Center, agreed.

“Concerns about business conditions and the labor market are casting a dark cloud over consumers that is not likely to lift until the job market improves,” she noted.

Clouds over Housing

That dark cloud continues to cast a large shadow over the housing market, diluting the positive impact of the federal home buyer tax credit and exacerbating the blowback since that financial prop was removed. Sales of existing homes declined by 5.1 percent in June to the lowest level in three months. The National Association of Realtors’ pending sales index, an indicator of future activity, also fell by 2.6 percent, while inventory levels increased to 8.9 months from 8.3 months in June.

New home sales, by contrast, jumped by 23.6 percent in July after declining by a staggering 36.7 percent in June. But despite that rebound, the July sales rate was still the second-lowest since 1963, when the National Association of Home Builders (NAHB) began compiling this data. And even with that rebound, Housing Intelligence reports that, for the last year-and-a-half, banks shedding foreclosed properties have sold more homes than builders selling new ones. It’s not hard to understand why the NAHB’s index of builder confidence sank in July to its lowest level since April of 1999.

Although inventory levels have declined for new homes, foreclosure rates are keeping downward pressure on prices (for existing homes, too). The Standard & Poor’s/Case-Shiller index of home prices increased only slightly in May, despite the sales boost provided by the tax credit. Separately, the real estate data firm Truila reported that sellers in 21 of the nation’s 50 largest housing markets reduced their asking prices by 30 percent or more in June, compared with 10 markets reporting price cuts in May. Although prices (measured by Case-Shiller) are now 5.1 percent above their April, 2009 low point, they remain nearly 30 percent below their July, 2006 peak, leaving analysts less than optimistic about the near-term and medium-term outlook for housing.

“A broader look at home price levels over the past year…does not indicate that the housing market is in any form of a sustained recovery,” David Blitzer, chairman of the S&P index committee, told reporters. His prediction: “It still looks possible that the housing market might bounce along the bottom for the foreseeable future before showing any real improvement that will filter through to the rest of the economy.”